Are you a Millennial dependent on gifted down payment?

As home prices soar across Canada, millennials are being priced out of the market – unless they have the assistance of a gifted down payment from the “bank of Mom and Dad”. Millennials are an eager group, born from the early 1980s to early 2000s, who have shown they too want to live the Canadian dream of home ownership. Just over one-third now own a home.

Statistics show that the number of millennials purchasing with the help of a gifted down payment has doubled, accounting for 15% of home purchases from 2014-2016 which is up from 7% in 2000. It is understandable for parents to always look out for the best interests of their children, but depending where the gifted down payment is coming from, the parents too in turn can see a cost.

In some families, gifted down payments come from refinancing homes and taking out equity, or the use of lines of credit (LOC) or investments. If parents are utilizing funds from their mortgage or LOC, they will be increasing their own costs by incurring interest charges, taking on a possible mortgage penalty or, if they are withdrawing funds from investments, even paying higher taxes.

What changed?

With the average Canadian home now priced at $530,304, more millennials need larger down payments or to move to areas with better affordability. In late 2016, new regulations were introduced to slow down the housing market and ensure that Canadians could handle a “stress test” of higher rates.

Prior to regulation changes, a purchaser with a 20% or less down payment (high ratio) would be eligible to get approved for a lender’s posted fixed rate. (In 2016, these posted fixed rates varied between 2.39-2.69%.) With the 2016 regulation changes, any high ratio mortgages (those with a 20% or less down payment) are now “stress tested” at the qualifying rate of 4.84%. With this new jump in the qualifying rate, millennials are left with only a few options to achieve their home-buying dreams: take a smaller mortgage, save for a larger down payment or turn to family for help with their purchase.

With the trend leaning to more stringent regulations on mortgage loans, millennials will be forced to save up more before they make their purchase or get a down payment gift from family – and those who don’t, may risk being priced out of the market.